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Finance in 2023

Brexit tech dividend favours innovation over big tech

  • The UK is using Brexit as an opportunity to develop a system of technology regulation that is pro-innovation and pro-competition.
  • On the pro-innovation side, it is looking to compete with the EU as a rule setter, but a lack of scale will hinder its appeal.
  • On the pro-competition side, it is, like the EU, looking to rein in the power of big tech companies, having already blocked some major deals.
  • This is the one area where the UK will have a major global impact, as it has a market large enough to be able to block a deal such as the merger of Microsoft and Activision.

On April 26th, the Competition and Markets Authority (CMA) blocked Microsoft’s acquisition of Activision (US), a gaming company. This was no surprise to EIU, as we had expected that at least one regulator worldwide would do so in 2023. But it may come as a surprise that the UK was the first (and may be the only) country to do so, as it has looked to spend its Brexit dividend by focusing on innovation. However, being pro-innovation in this case also means being pro-competition, a policy that is not to the advantage of big tech companies (Alphabet, Amazon, Apple, Meta, and Microsoft). While they may differ in terms of setting rules, the UK and the EU continue to be on the same page when it comes to scrutinising the competitive activity of big tech companies. 

The pro-innovation strategy

In March 2023, the British government announced three different and tech-related plans. 

Under the first initiative the government aims to make the UK a global science and technology superpower by 2030, by encouraging investment in three transformational technologies: artificial intelligence (AI), quantum computing and engineering biology. This will be part of a broader commitment to five technologies, also including future telecoms and semiconductors (where a specific strategy has been pending for several months). The government has earmarked extra investments of US$370m, but this is a small amount compared to the billions being spent in the US, EU or China, even if the government hopes that private investors will also invest.

The second initiative is the proposed Data Protection and Digital Information Bill, which is currently going through the Parliamentary process and aims to be a British version of the EU’s General Data Protection Regulation (GDPR). The law has been marketed as a common-sense version of GDPR, lowering costs and favouring innovation. But the EU’s adequacy decision from June 2021, which says that the UK data protection regime is equivalent to the one in the EU, will only stand if the UK does not diverge too much from the GDPR in terms of data protection regulation. Otherwise, British companies will face two different data protection systems, and the larger size of the EU market makes it more likely EU rules will be followed.

The third initiative was a white paper on AI regulation. The UK is taking the lightest of light touches to AI, and has so far decided not to introduce horizontal legislation or a single regulator. Instead, each sector will need to ensure that AI follows their rules. This differs from the EU, where the pending AI Act, due to be passed by the end of 2023, has taken a risk-based approach to the uses of AI. Under the EU proposal, AI systems with unacceptable risk will be banned ex-ante, and ones with high risk will have to follow very strict obligations before being allowed in the market.

All three UK initiatives highlight the growing policy differences between the UK and the EU, with the UK looking to provide a more pro-innovation approach. The country has been leading in Europe in terms of the number of unicorns (companies valued at over US$1bn), as well as technology investment and the overall value of the ecosystem. It has also benefited from a strong network of talent with its leading universities (Oxbridge or the Russell Group universities) and has tried to retain that edge through its Global Talent visa scheme. However, the UK is a much smaller market than the EU, and this makes it far more difficult for the country to take a global leading position in setting tech rules.

Regulating big tech and favouring competition

However, the UK can have a bigger impact and a global role when it comes to its competition policy. The Microsoft deal was not the first time that the CMA has blocked a big tech acquisition. In December 2021, it blocked the deal between Facebook and Giphy (US), a Graphics Interchange Format (GIF) search engine, the only global regulator to do so. This led Facebook abandoning the deal. The CMA also announced in April 2023 it would investigate Amazon’s US$1.7bn acquisition of iRobot (US), a maker of consumer robots including the Roomba. 

Also in April, the UK government announced the Digital Markets, Competition and Consumer Bill, a major piece of legislation looking at tech competition. It will set up a single regulator, as well as a Digital Markets Unit, and could fine companies by as much as 10% if they fail to comply with the rules, the same amount set out by the EU’s Digital Markets Act (DMA). Also in line with the DMA, which has specific obligations for the largest companies (known as “gatekeepers” or “Very Large Online Platforms”), the UK legislation will focus on tech companies with global revenues of  £25bn and UK revenues of £1bn. 

There is common ground between the UK and the EU when it comes to reining up big tech companies, and even times when the UK goes further than its EU counterpart. And although the UK market size is too limited to have a global impact in terms of innovation (where the focus is purely on securing the UK’s economic interests), that is not true of competition. The UK market is large enough that it could block a global deal, even if it is the only regulator in the world to make that decision. 

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